ExpertHard30 marksExtended Response
ACCA · Question 16 · Planning and Risk Assessment
SECTION B - QUESTION 16
SCENARIO: Titanium Forge PLC
You are the audit supervisor of Ironclad & Co, planning the audit of Titanium Forge PLC for the year ending 30 June 20X6. Titanium Forge manufactures specialized heavy components for the aerospace industry.
During the planning meeting, the finance director provided the following information:
- In January 20X6, the company installed a new automated production line. The costs capitalized include the purchase price, installation, and $500,000 of staff training costs to operate the new machinery.
- Inventory valuation is highly complex due to the long manufacturing cycle. Work-in-progress (WIP) includes a significant allocation of manufacturing overheads based on estimated normal capacity.
- The company secured a new $10m bank loan in October 20X5. The loan contains strict covenants requiring a minimum interest cover ratio. If breached, the loan becomes immediately repayable.
- Due to a booming industrial real estate market, Titanium Forge revalued its manufacturing facilities during the year, resulting in a $4m revaluation surplus.
- The company offers a standard 3-year warranty on all aerospace components. Recently, a major airline reported premature wear on a batch of components, leading to a product recall.
REQUIREMENTS:
(a) Identify and explain SIX audit risks from the scenario above.
(b) For each risk identified, describe the auditor's response to be included in the audit plan.
Note: Present your answer in a two-column format with 'Audit Risk' and 'Auditor's Response'.
SECTION B - QUESTION 16
SCENARIO: Titanium Forge PLC
You are the audit supervisor of Ironclad & Co, planning the audit of Titanium Forge PLC for the year ending 30 June 20X6. Titanium Forge manufactures specialized heavy components for the aerospace industry.
During the planning meeting, the finance director provided the following information:
- In January 20X6, the company installed a new automated production line. The costs capitalized include the purchase price, installation, and $500,000 of staff training costs to operate the new machinery.
- Inventory valuation is highly complex due to the long manufacturing cycle. Work-in-progress (WIP) includes a significant allocation of manufacturing overheads based on estimated normal capacity.
- The company secured a new $10m bank loan in October 20X5. The loan contains strict covenants requiring a minimum interest cover ratio. If breached, the loan becomes immediately repayable.
- Due to a booming industrial real estate market, Titanium Forge revalued its manufacturing facilities during the year, resulting in a $4m revaluation surplus.
- The company offers a standard 3-year warranty on all aerospace components. Recently, a major airline reported premature wear on a batch of components, leading to a product recall.
REQUIREMENTS:
(a) Identify and explain SIX audit risks from the scenario above.
(b) For each risk identified, describe the auditor's response to be included in the audit plan.
Note: Present your answer in a two-column format with 'Audit Risk' and 'Auditor's Response'.
How to approach this question
Read the scenario line by line. For every factual point, ask 'What could go wrong in the financial statements?' (This is the risk). Then ask 'What will I do as an auditor to check this?' (This is the response). Ensure responses are specific actions, not vague statements.
Full Answer
Audit risk questions require a clear link between a scenario fact and a potential misstatement in the financial statements. Responses must be specific audit procedures (e.g., 'recalculate', 'review correspondence', 'inspect breakdown') rather than vague objectives (e.g., 'check the asset').
Common mistakes
1) Identifying business risks instead of audit risks (e.g., 'The machinery might break down'). 2) Providing vague responses (e.g., 'Check the inventory'). 3) Failing to state whether an account is over or understated.
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